Ever since the 1970s, when inflation became a virtually global
phenomenon, controlling inflation has become a high priority for
policy-makers. Given the well-known costs of inflation, policy now in
all countries is inflation-averse. Perhaps one of the more important
adverse consequences of inflation may be that high and persistent
inflation is a regressive tax1 which adversely impacts the poor.2 The
poor are extremely limited in their options to protect themselves
against inflation; they are normally asset-poor, while most of their
saving is in the form of cash. Inflation erodes cash savings and
protects the rich who hold real assets.3 It is not surprising that
inflation may be politically costly for the government. Studies have
also found that high and volatile inflation has been detrimental to
growth and financial sector development. Resource allocation is
inhibited as inflation obscures relative price changes and thus inhibits
optimal resource allocation. For policy to control inflation, it is
important to understand the factors that drive inflation.
Unquestionably, empirical evidence points to “inflation being always and
everywhere a monetary phenomenon” [Friedman (1963)]. However, there
still remains some debate on whether supply-side factors could cause
inflation without monetary accommodation.4 The structuralist school of
thought holds that supply constraints that drive up prices of specific
goods can have wider repercussions on the overall price level.
Similarly, there are a number of possible sources of rising costs such
as wages, profits, imported inflation-exchange rate, commodity prices,
external shocks, exhaustion of natural resources, and taxes. For
example, in Pakistan, increases in the wheat support price have
frequently been blamed for increasing inflation.5 ........
Trade and Real Wages of the Rich and Poor: Cross-Region Evidence
